Private Information and the Exercise of Executive Stock Options

This paper finds strong evidence that executives use private information when exercising their stock options. The most informed executives tend to exercise early, do not exercise on the vest date, do not exercise to capture dividends, exercise a high percentage of their options, and exercise when the option is the least in-the-money. We also find that exercises around resignation and retirement are followed by significant negative abnormal returns. Furthermore, the operating performance of firms following exercises motivated by private information is significantly worse than that of firms in which the exercises are not motivated by private information.